Life Insurance

To thrive in a radically changing marketplace, life insurers must transform their offerings first by generating maximum cash from existing products and services, then by reinvesting it in more specialized capabilities.

The life insurance industry faces permanent disruption from a number of new and ongoing challenges. These include a structural decline in the attractiveness and profitability of traditional life insurance products, new regulatory rules and restrictions, intense competition from alternative suppliers, and the digitization of the marketplace—all of which are driving new customer expectations.

To adapt and prosper, life insurers must maximize cash generation from declining parts of their business and reinvest that capital into specific, significant opportunities for growth.

BCG has identified four winning business models—each based on a core industry capability—that allow life insurers to create long-term value, penetrate new and burgeoning markets, and rebuild competitive advantage:

Low-Cost Savings Provider. This model addresses the global savings gap that will continue to widen as government and private employers scale down retirement and pension benefits. Insurers with this capability will need to develop new, low-cost administration platforms; keep their core asset management propositions simple and cheap; provide product flexibility; rely on third-party and digital distribution to drive down sales costs; and seek incremental sources of revenue, such as value-added asset management solutions. This model, which is particularly applicable to group business where downward price pressure is strongest, requires a ruthless focus on cost and avoidance of complexity.

Next-Generation Risk Manager. This model satisfies consumers’ increasing demands for long-term security. Insurers focused on this capability will specialize in helping consumers manage uncertainty; develop and market simple, low-cost, and capital-light guaranteed or smoothed products to the mass market; and build sophisticated data analytics capabilities to manage risk and pricing. Even within this business model, some insurers will choose to target the high-volume market with simple propositions, while others will build higher service models targeting specific segments.

Customer and Segment Specialist. Players in this model are focused on using traditional and emerging channels to satisfy the more complex needs of retirees and other growth segments. They can do this by identifying target segments based on growth, value, and channel preference; using digital channels to collect data that help drive customer insight; and developing advanced solutions rather than just products. Successful insurers will need to invest in engaging their customers through high-quality content that is delivered through digital channels; they will recover this investment through better retention, cross-sales, and referrals. In this model, quality of service trumps product.

Captive Distributor. These players focus on reaching new customers and creating strong customer franchises, particularly in developing markets. They can win in this area by building direct distribution where possible, developing sales management capabilities, fully integrating digital channels into the proposition, differentiating levels of service and engagement, and adding scale through other channels. These vertically integrated models should simplify the proposition for the agent and the end-customer, making the sales process more efficient.

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Regardless of the business model that insurers choose to focus on, the ability to integrate technology will be critical, whether in enhancing the customer experience, supporting the sales process (such as with robo-advice), using richer data to assess risk, or delivering the proposition at low cost. It is the digital insurance provider that will prevail.

By focusing on cash generation and the development of new business models, insurers can expect intensive organizational and financial implications. BCG can help guide the transformation by providing insurers with a roadmap for change and a structured process to define and deliver a smooth and effective transition, as well as by helping to build the skills required to achieve excellence in asset management, build attractive growth positions, integrate technology and a customer focus, and ultimately return capital to shareholders.

Embracing Digital

Many life insurers have managed to keep digitization at bay and hang on to their traditional agent-based, manufacturing-led sales and service models, even as other service-based companies have moved into a brave new online world. That won’t last much longer, though. A new digital ecosystem is taking shape within insurance markets, driven largely by new consumer demands for simplicity, self-service, transparency, and choice, and it is affecting every aspect of the insurance value chain. Companies that don’t adapt will quickly fall behind.

Digitization does not mean that life insurers have to completely give up their high-touch, high-information, brokered approach to sales and customer service. Digital solutions such as social media, mobile applications, video, and big data analytics can smooth the transition by tapping into new sources of customer data and making it faster and more efficient for insurers. This, in turn, will ensure customers get information the way they want it, while letting agents address those information needs and decision points that require a human touch.

Embracing digitization can also help life insurers:

Enhance business processes.

Increase market penetration.

Better measure and manage risk.

Improve underwriting accuracy.

Deepen customer relationships and enable more trust and transparency.

Build asset management solutions at lower cost.

BCG can provide life insurers with their own unique roadmap to digitization by taking into account the following four factors:

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